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By PETER S. GOODMAN
“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004
George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”
And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.
Today, with the world caught in an economic tempest that Mr. Greenspan recently described as “the type of wrenching financial crisis that comes along only once in a century,” his faith in derivatives remains unshaken.
The problem is not that the contracts failed, he says. Rather, the people using them got greedy. A lack of integrity spawned the crisis, he argued in a speech a week ago at Georgetown University, intimating that those peddling derivatives were not as reliable as “the pharmacist who fills the prescription ordered by our physician.”
But others hold a starkly different view of how global markets unwound, and the role that Mr. Greenspan played in setting up this unrest.
“Clearly, derivatives are a centerpiece of the crisis, and he was the leading proponent of the deregulation of derivatives,” said Frank Partnoy, a law professor at the University of San Diego and an expert on financial regulation.
The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.
If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted.
Over the years, Mr. Greenspan helped enable an ambitious American experiment in letting market forces run free. Now, the nation is confronting the consequences.
Derivatives were created to soften — or in the argot of Wall Street, “hedge” — investment losses. For example, some of the contracts protect debt holders against losses on mortgage securities. (Their name comes from the fact that their value “derives” from underlying assets like stocks, bonds and commodities.) Many individuals own a common derivative: the insurance contract on their homes.
On a grander scale, such contracts allow financial services firms and corporations to take more complex risks that they might otherwise avoid — for example, issuing more mortgages or corporate debt. And the contracts can be traded, further limiting risk but also increasing the number of parties exposed if problems occur.
Throughout the 1990s, some argued that derivatives had become so vast, intertwined and inscrutable that they required federal oversight to protect the financial system. In meetings with federal officials, celebrated appearances on Capitol Hill and heavily attended speeches, Mr. Greenspan banked on the good will of Wall Street to self-regulate as he fended off restrictions.
Ever since housing began to collapse, Mr. Greenspan’s record has been up for revision. Economists from across the ideological spectrum have criticized his decision to let the nation’s real estate market continue to boom with cheap credit, courtesy of low interest rates, rather than snuffing out price increases with higher rates. Others have criticized Mr. Greenspan for not disciplining institutions that lent indiscriminately.
But whatever history ends up saying about those decisions, Mr. Greenspan’s legacy may ultimately rest on a more deeply embedded and much less scrutinized phenomenon: the spectacular boom and calamitous bust in derivatives trading.
Faith in the System
Some analysts say it is unfair to blame Mr. Greenspan because the crisis is so sprawling. “The notion that Greenspan could have generated a totally different outcome is naïve,” said Robert E. Hall, an economist at the conservative Hoover Institution, a research group at Stanford.
Mr. Greenspan declined requests for an interview. His spokeswoman referred questions about his record to his memoir, “The Age of Turbulence,” in which he outlines his beliefs.
“It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade,” Mr. Greenspan writes. “The worst have failed; investors no longer fund them and are not likely to in the future.”
In his Georgetown speech, he entertained no talk of regulation, describing the financial turmoil as the failure of Wall Street to behave honorably.
“In a market system based on trust, reputation has a significant economic value,” Mr. Greenspan told the audience. “I am therefore distressed at how far we have let concerns for reputation slip in recent years.”
As the long-serving chairman of the Fed, the nation’s most powerful economic policy maker, Mr. Greenspan preached the transcendent, wealth-creating powers of the market.
A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly.
An examination of more than two decades of Mr. Greenspan’s record on financial regulation and derivatives in particular reveals the degree to which he tethered the health of the nation’s economy to that faith.
As the nascent derivatives market took hold in the early 1990s, and in subsequent years, critics denounced an absence of rules forcing institutions to disclose their positions and set aside funds as a reserve against bad bets.
Time and again, Mr. Greenspan — a revered figure affectionately nicknamed the Oracle — proclaimed that risks could be handled by the markets themselves.
“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University. “I think of him as consistently cheerleading on derivatives.”
Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, says Mr. Greenspan opposes regulating derivatives because of a fundamental disdain for government.
Mr. Levitt said that Mr. Greenspan’s authority and grasp of global finance consistently persuaded less financially sophisticated lawmakers to follow his lead.
“I always felt that the titans of our legislature didn’t want to reveal their own inability to understand some of the concepts that Mr. Greenspan was setting forth,” Mr. Levitt said. “I don’t recall anyone ever saying, ‘What do you mean by that, Alan?’ ”
Still, over a long stretch of time, some did pose questions. In 1992, Edward J. Markey, a Democrat from Massachusetts who led the House subcommittee on telecommunications and finance, asked what was then the General Accounting Office to study derivatives risks.
Two years later, the office released its report, identifying “significant gaps and weaknesses” in the regulatory oversight of derivatives.
“The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole,” Charles A. Bowsher, head of the accounting office, said when he testified before Mr. Markey’s committee in 1994. “In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers.”
In his testimony at the time, Mr. Greenspan was reassuring. “Risks in financial markets, including derivatives markets, are being regulated by private parties,” he said.
“There is nothing involved in federal regulation per se which makes it superior to market regulation.”
Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. “The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence,” he said.
But he called that possibility “extremely remote,” adding that “risk is part of life.”
Later that year, Mr. Markey introduced a bill requiring greater derivatives regulation. It never passed.
Resistance to Warnings
In 1997, the Commodity Futures Trading Commission, a federal agency that regulates options and futures trading, began exploring derivatives regulation. The commission, then led by a lawyer named Brooksley E. Born, invited comments about how best to oversee certain derivatives.
Ms. Born was concerned that unfettered, opaque trading could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it,” she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses.
Ms. Born’s views incited fierce opposition from Mr. Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market. Mr. Greenspan warned that too many rules would damage Wall Street, prompting traders to take their business overseas.
“Greenspan told Brooksley that she essentially didn’t know what she was doing and she’d cause a financial crisis,” said Michael Greenberger, who was a senior director at the commission. “Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.”
Ms. Born declined to comment. Mr. Rubin, now a senior executive at the banking giant Citigroup, says that he favored regulating derivatives — particularly increasing potential loss reserves — but that he saw no way of doing so while he was running the Treasury.
“All of the forces in the system were arrayed against it,” he said. “The industry certainly didn’t want any increase in these requirements. There was no potential for mobilizing public opinion.”
Mr. Greenberger asserts that the political climate would have been different had Mr. Rubin called for regulation.
In early 1998, Mr. Rubin’s deputy, Lawrence H. Summers, called Ms. Born and chastised her for taking steps he said would lead to a financial crisis, according to Mr. Greenberger. Mr. Summers said he could not recall the conversation but agreed with Mr. Greenspan and Mr. Rubin that Ms. Born’s proposal was “highly problematic.”
On April 21, 1998, senior federal financial regulators convened in a wood-paneled conference room at the Treasury to discuss Ms. Born’s proposal. Mr. Rubin and Mr. Greenspan implored her to reconsider, according to both Mr. Greenberger and Mr. Levitt.
Ms. Born pushed ahead. On June 5, 1998, Mr. Greenspan, Mr. Rubin and Mr. Levitt called on Congress to prevent Ms. Born from acting until more senior regulators developed their own recommendations. Mr. Levitt says he now regrets that decision. Mr. Greenspan and Mr. Rubin were “joined at the hip on this,” he said. “They were certainly very fiercely opposed to this and persuaded me that this would cause chaos.”
Ms. Born soon gained a potent example. In the fall of 1998, the hedge fund Long Term Capital Management nearly collapsed, dragged down by disastrous bets on, among other things, derivatives. More than a dozen banks pooled $3.6 billion for a private rescue to prevent the fund from slipping into bankruptcy and endangering other firms.
Despite that event, Congress froze the Commodity Futures Trading Commission’s regulatory authority for six months. The following year, Ms. Born departed.
In November 1999, senior regulators — including Mr. Greenspan and Mr. Rubin — recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives.
Mr. Greenspan, according to lawmakers, then used his prestige to make sure Congress followed through. “Alan was held in very high regard,” said Jim Leach, an Iowa Republican who led the House Banking and Financial Services Committee at the time. “You’ve got an area of judgment in which members of Congress have nonexistent expertise.”
As the stock market roared forward on the heels of a historic bull market, the dominant view was that the good times largely stemmed from Mr. Greenspan’s steady hand at the Fed.
“You will go down as the greatest chairman in the history of the Federal Reserve Bank,” declared Senator Phil Gramm, the Texas Republican who was chairman of the Senate Banking Committee when Mr. Greenspan appeared there in February 1999.
Mr. Greenspan’s credentials and confidence reinforced his reputation — helping him to persuade Congress to repeal Depression-era laws that separated commercial and investment banking in order to reduce overall risk in the financial system.
“He had a way of speaking that made you think he knew exactly what he was talking about at all times,” said Senator Tom Harkin, a Democrat from Iowa. “He was able to say things in a way that made people not want to question him on anything, like he knew it all. He was the Oracle, and who were you to question him?”
In 2000, Mr. Harkin asked what might happen if Congress weakened the C.F.T.C.’s authority.
“If you have this exclusion and something unforeseen happens, who does something about it?” he asked Mr. Greenspan in a hearing.
Mr. Greenspan said that Wall Street could be trusted. “There is a very fundamental trade-off of what type of economy you wish to have,” he said. “You can have huge amounts of regulation and I will guarantee nothing will go wrong, but nothing will go right either,” he said.
Later that year, at a Congressional hearing on the merger boom, he argued that Wall Street had tamed risk.
“Aren’t you concerned with such a growing concentration of wealth that if one of these huge institutions fails that it will have a horrendous impact on the national and global economy?” asked Representative Bernard Sanders, an independent from Vermont.
“No, I’m not,” Mr. Greenspan replied. “I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically — I should say, fully — hedged.”
The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.’s authority to an 11,000-page appropriations bill. The Senate passed it. President Clinton signed it into law.
Pressing Forward
Still, savvy investors like Mr. Buffett continued to raise alarms about derivatives, as he did in 2003, in his annual letter to shareholders of his company, Berkshire Hathaway.
“Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers,” he wrote. “The troubles of one could quickly infect the others.”
But business continued.
And when Mr. Greenspan began to hear of a housing bubble, he dismissed the threat. Wall Street was using derivatives, he said in a 2004 speech, to share risks with other firms.
Shared risk has since evolved from a source of comfort into a virus. As the housing crisis grew and mortgages went bad, derivatives actually magnified the downturn.
The Wall Street debacle that swallowed firms like Bear Stearns and Lehman Brothers, and imperiled the insurance giant American International Group, has been driven by the fact that they and their customers were linked to one another by derivatives.
In recent months, as the financial crisis has gathered momentum, Mr. Greenspan’s public appearances have become less frequent.
His memoir was released in the middle of 2007, as the disaster was unfolding, and his book tour suddenly became a referendum on his policies. When the paperback version came out this year, Mr. Greenspan wrote an epilogue that offers a rebuttal of sorts.
“Risk management can never achieve perfection,” he wrote. The villains, he wrote, were the bankers whose self-interest he had once bet upon.
“They gambled that they could keep adding to their risky positions and still sell them out before the deluge,” he wrote. “Most were wrong.”
No federal intervention was marshaled to try to stop them, but Mr. Greenspan has no regrets.
“Governments and central banks,” he wrote, “could not have altered the course of the boom.”
Thursday, October 9, 2008
Saved by the Deficit?
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By ROBERT B. REICH
BOTH presidential candidates have been criticized for failing — at Tuesday’s debate and previously — to name any promises or plans they’re going to have to scrap because of the bailout and the failing economy. That criticism is unwarranted. The assumption that we are about to have a rerun of 1993 — when Bill Clinton, newly installed as president, was forced to jettison much of his agenda because of a surging budget deficit — may well be mistaken.
At first glance, January 2009 is starting to look a lot like January 1993. Then, the federal deficit was running at roughly $300 billion a year, or about 5 percent of gross domestic product, way too high for comfort. By contrast, the deficit for the 2009 fiscal year is now projected to be $410 billion, or about 3.3 percent of gross domestic product. That’s not too worrying. But if the Treasury shovels out the full $700 billion of bailout money next year, the deficit could balloon to more than 6 percent of gross domestic product, the highest since 1983. And if the nation plunges into a deeper recession, with tax revenues dropping and domestic product shrinking, the deficit will be even larger as a proportion of the economy.
Yet all is not what it seems. First, the $700 billion bailout is less like an additional government expense than a temporary loan or investment. The Treasury will take on Wall Street’s bad debts — mostly mortgage-backed securities for which there’s no market right now — and will raise the $700 billion by issuing additional government debt, much of it to global lenders and foreign governments. As America’s housing stock regains value, as we all hope it will, bad debts become better debts, and the Treasury will be able to resell the securities for at least as much as it paid, if not for a profit. And if there is a shortfall, the bailout bill allows the president to impose a fee on Wall Street to fill it.
Another difference is that in 1993, the nation was emerging from a recession. Although jobs were slow to return, factory orders were up and the economy was growing. This meant growing demand for private capital. Under these circumstances, the deficit Bill Clinton inherited threatened to overheat the economy. He had no choice but to trim it, a point that the Federal Reserve chairman, Alan Greenspan, was not reluctant to emphasize. Unless President Clinton cut the deficit and abandoned much of his agenda, interest rates would rise and the economic recovery would be anemic.
Next year, however, is likely to be quite different. All economic indicators are now pointing toward a deepening recession. Unemployment is already high, and the trend is not encouraging. Factory orders are down. Worried about their jobs and rising costs of fuel, food and health insurance, middle-class Americans are unable or unwilling to spend on much other than necessities.
Under these circumstances, deficit spending is not unwelcome. Indeed, as spender of last resort, the government will probably have to run deficits to keep the economy going anywhere near capacity, a lesson the nation learned when mobilization for World War II finally lifted us out of the Great Depression.
Finally, not all deficits are equal. As every family knows, going into debt in order to send a child to college is fundamentally different from going into debt to take an ocean cruise. Deficits that finance investments in the nation’s future are not the same as deficits that maintain the current standard of living.
Here again, there’s marked difference between 1993 and 2009. Then, some of our highways, bridges, levees and transit systems needed repair. Today, they are crumbling. In 1993, some of our children were in classrooms too crowded to learn in, and some districts were shutting preschool and after-school programs. Today, such inadequacies are endemic. In 1993, some 35 million Americans had no health insurance and millions more were barely able to afford it. Today, 50 million are without insurance, and a large swath of the middle class is barely holding on. In 1993, climate change was a problem. Now, it’s an emergency.
Moreover, without adequate public investment, the vast majority of Americans will be condemned to a lower standard of living for themselves and their children. The top 1 percent now takes home about 20 percent of total national income. As recently as 1980, it took home 8 percent. Although the economy has grown considerably since 1980, the middle class’s share has shrunk. That’s a problem not just because it strikes so many as being unfair, but also because it’s starting to limit the capacity of most Americans to buy the goods and services we produce without going deep into debt. The last time the top 1 percent took home 20 percent of national income, not incidentally, was 1928.
Perhaps it should not be surprising, then, that the Wall Street bailout has generated so much anger among middle-class Americans. Let’s not compound the problem by needlessly letting it prevent the government from spending what it must to lift the prospects of Main Street.
By ROBERT B. REICH
BOTH presidential candidates have been criticized for failing — at Tuesday’s debate and previously — to name any promises or plans they’re going to have to scrap because of the bailout and the failing economy. That criticism is unwarranted. The assumption that we are about to have a rerun of 1993 — when Bill Clinton, newly installed as president, was forced to jettison much of his agenda because of a surging budget deficit — may well be mistaken.
At first glance, January 2009 is starting to look a lot like January 1993. Then, the federal deficit was running at roughly $300 billion a year, or about 5 percent of gross domestic product, way too high for comfort. By contrast, the deficit for the 2009 fiscal year is now projected to be $410 billion, or about 3.3 percent of gross domestic product. That’s not too worrying. But if the Treasury shovels out the full $700 billion of bailout money next year, the deficit could balloon to more than 6 percent of gross domestic product, the highest since 1983. And if the nation plunges into a deeper recession, with tax revenues dropping and domestic product shrinking, the deficit will be even larger as a proportion of the economy.
Yet all is not what it seems. First, the $700 billion bailout is less like an additional government expense than a temporary loan or investment. The Treasury will take on Wall Street’s bad debts — mostly mortgage-backed securities for which there’s no market right now — and will raise the $700 billion by issuing additional government debt, much of it to global lenders and foreign governments. As America’s housing stock regains value, as we all hope it will, bad debts become better debts, and the Treasury will be able to resell the securities for at least as much as it paid, if not for a profit. And if there is a shortfall, the bailout bill allows the president to impose a fee on Wall Street to fill it.
Another difference is that in 1993, the nation was emerging from a recession. Although jobs were slow to return, factory orders were up and the economy was growing. This meant growing demand for private capital. Under these circumstances, the deficit Bill Clinton inherited threatened to overheat the economy. He had no choice but to trim it, a point that the Federal Reserve chairman, Alan Greenspan, was not reluctant to emphasize. Unless President Clinton cut the deficit and abandoned much of his agenda, interest rates would rise and the economic recovery would be anemic.
Next year, however, is likely to be quite different. All economic indicators are now pointing toward a deepening recession. Unemployment is already high, and the trend is not encouraging. Factory orders are down. Worried about their jobs and rising costs of fuel, food and health insurance, middle-class Americans are unable or unwilling to spend on much other than necessities.
Under these circumstances, deficit spending is not unwelcome. Indeed, as spender of last resort, the government will probably have to run deficits to keep the economy going anywhere near capacity, a lesson the nation learned when mobilization for World War II finally lifted us out of the Great Depression.
Finally, not all deficits are equal. As every family knows, going into debt in order to send a child to college is fundamentally different from going into debt to take an ocean cruise. Deficits that finance investments in the nation’s future are not the same as deficits that maintain the current standard of living.
Here again, there’s marked difference between 1993 and 2009. Then, some of our highways, bridges, levees and transit systems needed repair. Today, they are crumbling. In 1993, some of our children were in classrooms too crowded to learn in, and some districts were shutting preschool and after-school programs. Today, such inadequacies are endemic. In 1993, some 35 million Americans had no health insurance and millions more were barely able to afford it. Today, 50 million are without insurance, and a large swath of the middle class is barely holding on. In 1993, climate change was a problem. Now, it’s an emergency.
Moreover, without adequate public investment, the vast majority of Americans will be condemned to a lower standard of living for themselves and their children. The top 1 percent now takes home about 20 percent of total national income. As recently as 1980, it took home 8 percent. Although the economy has grown considerably since 1980, the middle class’s share has shrunk. That’s a problem not just because it strikes so many as being unfair, but also because it’s starting to limit the capacity of most Americans to buy the goods and services we produce without going deep into debt. The last time the top 1 percent took home 20 percent of national income, not incidentally, was 1928.
Perhaps it should not be surprising, then, that the Wall Street bailout has generated so much anger among middle-class Americans. Let’s not compound the problem by needlessly letting it prevent the government from spending what it must to lift the prospects of Main Street.
Stocks Plunge Again; Dow Under 8,600
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By VIKAS BAJAJ
Stocks fell sharply in late afternoon trading in New York on Thursday as concerns about the global financial system mounted and investors priced in a deep recession.
The Standard & Poor’s 500 stock index was down nearly 7.6 percent and the Dow Jones industrial average was down 678.91 points, or about 7.3 percent, both posting one of their worst days in post-war history. The Nasdaq composite was down 5.4 percent.
Wells Fargo, Morgan Stanley and other bank stocks were among the biggest losers and the financial sector as a whole was down nearly 11 percent in late afternoon trading. But the major indexes were also pulled down by big drops in stocks like Exxon Mobil, General Electric and Chevron.
The sell-off suggests investors are pricing in a much deeper recession than the markets had previously thought was likely. New data released on Thursday also showed that retail investors were withdrawing tens of billions of dollars from stock mutual funds — a sign that the panic on Wall Street was spreading.
The White House announced on Thursday afternoon that President Bush will speak on Friday at 10 a.m. in an attempt to reassure people on the economy. "Americans should be confident that every effort is being taken to stabilize our markets," said Dana Perino, the president’s chief spokeswoman.Thursday’s decline came after the Treasury Department signaled that it would move quickly to inject money directly into big financial firms in addition to buying up to $700 billion in troubled loans and securities from the companies.
“There is a downward spiral of fear still about whether the measures put in place will be enough,” Richard Sparks, senior equities analyst at Schaeffer’s Investment Research, said. “You continue to see selling into any strength.”
On Wednesday, the Federal Reserve, the European Central Bank, the Bank of England and other central banks moved to jointly cut their benchmark interest rates by half a point, seeking to renew confidence in an increasingly panicked international financial community.
But financial stocks continued to struggle Thursday. Shares of Morgan Stanley were down about 22 percent on more speculation about the status of a planned $9 billion investment by Japan’s top bank, Mitsubishi UFJ Financial Group. Morgan Stanley, as it did earlier this week, denied the speculation and again said that the deal was on track.
Wells Fargo shares were down about 16.9 percent, Citigroup was down 7 percent, Bank of America 9 percent and JPMorgan Chase 3.7 percent.
Shares in the insurance giant, American International Group, declined almost 21 percent, after the Federal Reserve Board said that it would provide up to $37.8 billion to the company to help it deal with a rapidly dwindling supply of cash.
Shares of the automaker, General Motors, fell 31 percent, to $4.76, after the company said its European sales declined through the first three quarters. Ford shares were down 21.8 percent, to $2.08.
Some analysts said that the end of a ban on short-sellers may have played a part in Thursday’s falls, contributing in particular to the sharp declines in some bank share prices, such as that of Morgan Stanley.
But Mr. Sparks said the sharp declines were occurring even when the ban was in place.
Oil prices continued to decline, falling $1.97 to $86.98 a barrel as inventories at wholesalers rose twice as much as forecast in August.
In European trading, the DJ Euro Stoxx 50 index, a barometer of euro zone blue chips, closed down 2.4 percent, while the FTSE 100 index in London declined 1.2 percent. The CAC-40 in Paris fell 1.5 percent, and the DAX in Frankfurt 2.5 percent.
A day after interest rate cuts elsewhere in the world, central banks in Taiwan and South Korea both cut their main rates by a quarter-point. The Hong Kong Monetary Authority also cut its base rate by a half-point to 2 percent.
Meanwhile in Iceland, the government seized Kaupthing Bank, the country’s largest lender, effectively completing the nationalization of its banking system.
In Asia, the Nikkei 225 stock average fell 0.5 percent, after a rout Wednesday wiped 9.4 percent off the index.
In Hong Kong, the Hang Seng index was up 3.3 percent, after an 8.2 percent slump Wednesday. The S.&P./ASX 200 index in Sydney fell 1.5 percent.
In spite of the central bank moves this week, which have included a flood of liquidity into the markets, the strains in the credit market showed little sign of easing.
Banks in Hong Kong left their main lending rates unchanged, even after the central bank’s move, as the rates lenders must pay to borrow in the interbank market remained prohibitive.
Michael T. Darda, chief economist at the research firm MKM Partners, said spreads in short-term funding markets had hit a record high Thursday morning.
He said “corporate and high-yield markets remain under incredible stress, meaning long-term funding markets are dislocated as well.”
The three-month London interbank offered rate, or Libor, rose to 4.75 percent, according to the British Banking Association.
The spread, or gap, between the yield on safe three-month United States government securities and the rate that banks charge one another for dollar loans of the same duration rose slightly, to 4.11 percentage points, suggesting that banks remain extremely reluctant to lend to one another.
“To see little or no reaction in the fixings is very disappointing and reinforces the fact that Libor is broken and that the transmission mechanism from central banks isn’t working,” Barry Moran, a Dublin-based currency trader at Bank of Ireland, told Bloomberg News. “Things are still very stressed and we don’t know what’s going to fix it in the short term.”
In a research note, Dariusz Kowalczyk, chief investment strategist at CFC Symour in Hong Kong, said: “Lower policy rates did little to diminish market rates and failed to restore confidence in the banking system. In fact, using up of monetary ammunition with such little effect may hurt sentiment by highlighting the severity of the crisis.”
“Deep recession in all major developed economies and many others is still looming,” he said.
By VIKAS BAJAJ
Stocks fell sharply in late afternoon trading in New York on Thursday as concerns about the global financial system mounted and investors priced in a deep recession.
The Standard & Poor’s 500 stock index was down nearly 7.6 percent and the Dow Jones industrial average was down 678.91 points, or about 7.3 percent, both posting one of their worst days in post-war history. The Nasdaq composite was down 5.4 percent.
Wells Fargo, Morgan Stanley and other bank stocks were among the biggest losers and the financial sector as a whole was down nearly 11 percent in late afternoon trading. But the major indexes were also pulled down by big drops in stocks like Exxon Mobil, General Electric and Chevron.
The sell-off suggests investors are pricing in a much deeper recession than the markets had previously thought was likely. New data released on Thursday also showed that retail investors were withdrawing tens of billions of dollars from stock mutual funds — a sign that the panic on Wall Street was spreading.
The White House announced on Thursday afternoon that President Bush will speak on Friday at 10 a.m. in an attempt to reassure people on the economy. "Americans should be confident that every effort is being taken to stabilize our markets," said Dana Perino, the president’s chief spokeswoman.Thursday’s decline came after the Treasury Department signaled that it would move quickly to inject money directly into big financial firms in addition to buying up to $700 billion in troubled loans and securities from the companies.
“There is a downward spiral of fear still about whether the measures put in place will be enough,” Richard Sparks, senior equities analyst at Schaeffer’s Investment Research, said. “You continue to see selling into any strength.”
On Wednesday, the Federal Reserve, the European Central Bank, the Bank of England and other central banks moved to jointly cut their benchmark interest rates by half a point, seeking to renew confidence in an increasingly panicked international financial community.
But financial stocks continued to struggle Thursday. Shares of Morgan Stanley were down about 22 percent on more speculation about the status of a planned $9 billion investment by Japan’s top bank, Mitsubishi UFJ Financial Group. Morgan Stanley, as it did earlier this week, denied the speculation and again said that the deal was on track.
Wells Fargo shares were down about 16.9 percent, Citigroup was down 7 percent, Bank of America 9 percent and JPMorgan Chase 3.7 percent.
Shares in the insurance giant, American International Group, declined almost 21 percent, after the Federal Reserve Board said that it would provide up to $37.8 billion to the company to help it deal with a rapidly dwindling supply of cash.
Shares of the automaker, General Motors, fell 31 percent, to $4.76, after the company said its European sales declined through the first three quarters. Ford shares were down 21.8 percent, to $2.08.
Some analysts said that the end of a ban on short-sellers may have played a part in Thursday’s falls, contributing in particular to the sharp declines in some bank share prices, such as that of Morgan Stanley.
But Mr. Sparks said the sharp declines were occurring even when the ban was in place.
Oil prices continued to decline, falling $1.97 to $86.98 a barrel as inventories at wholesalers rose twice as much as forecast in August.
In European trading, the DJ Euro Stoxx 50 index, a barometer of euro zone blue chips, closed down 2.4 percent, while the FTSE 100 index in London declined 1.2 percent. The CAC-40 in Paris fell 1.5 percent, and the DAX in Frankfurt 2.5 percent.
A day after interest rate cuts elsewhere in the world, central banks in Taiwan and South Korea both cut their main rates by a quarter-point. The Hong Kong Monetary Authority also cut its base rate by a half-point to 2 percent.
Meanwhile in Iceland, the government seized Kaupthing Bank, the country’s largest lender, effectively completing the nationalization of its banking system.
In Asia, the Nikkei 225 stock average fell 0.5 percent, after a rout Wednesday wiped 9.4 percent off the index.
In Hong Kong, the Hang Seng index was up 3.3 percent, after an 8.2 percent slump Wednesday. The S.&P./ASX 200 index in Sydney fell 1.5 percent.
In spite of the central bank moves this week, which have included a flood of liquidity into the markets, the strains in the credit market showed little sign of easing.
Banks in Hong Kong left their main lending rates unchanged, even after the central bank’s move, as the rates lenders must pay to borrow in the interbank market remained prohibitive.
Michael T. Darda, chief economist at the research firm MKM Partners, said spreads in short-term funding markets had hit a record high Thursday morning.
He said “corporate and high-yield markets remain under incredible stress, meaning long-term funding markets are dislocated as well.”
The three-month London interbank offered rate, or Libor, rose to 4.75 percent, according to the British Banking Association.
The spread, or gap, between the yield on safe three-month United States government securities and the rate that banks charge one another for dollar loans of the same duration rose slightly, to 4.11 percentage points, suggesting that banks remain extremely reluctant to lend to one another.
“To see little or no reaction in the fixings is very disappointing and reinforces the fact that Libor is broken and that the transmission mechanism from central banks isn’t working,” Barry Moran, a Dublin-based currency trader at Bank of Ireland, told Bloomberg News. “Things are still very stressed and we don’t know what’s going to fix it in the short term.”
In a research note, Dariusz Kowalczyk, chief investment strategist at CFC Symour in Hong Kong, said: “Lower policy rates did little to diminish market rates and failed to restore confidence in the banking system. In fact, using up of monetary ammunition with such little effect may hurt sentiment by highlighting the severity of the crisis.”
“Deep recession in all major developed economies and many others is still looming,” he said.
Fears in China about the impact of global economic crisis
Go to Original
By John Chan
Beijing is increasingly worried about the impact of the global financial storm and looming international recession on the Chinese economy. While joining other major economies to try to stabilise American and world capitalism, the Chinese regime is also concerned at the economic, social and political stresses being generated by a sharp slowdown at home.
Yesterday the People’s Bank of China joined other major central banks around the world in an effort to steady international financial markets via coordinated interest rate cuts. More fundamentally, China continues to hold massive amounts of US debt—already more than $1 trillion—which, as well as maintaining currency exchange rates, helps to shore up the US economy.
During a trip to the UN, Chinese Premier Wen Jiabao met leading American financial figures on September 24 to express his grave concerns at the unfolding financial meltdown. Those present included Timothy Geithner, president of the New York Federal Reserve Bank; Robert Rubin, Citigroup chairman and former US Treasury Secretary and Andrew Liveris, chairman of the US-China Business Council and of Dow Chemicals.
Wen declared that the most important commodity had become “confidence” in the American economy, saying it was “more important than gold and currency”. Dismissing comparisons with the 1930s Depression, Wen insisted that the situation was different because the US was now based on high-tech industries and therefore “sound”. He declared that Beijing was willing to cooperate to maintain US financial stability because that would be “beneficial to China”.
Just how anxious China is about the US economy was revealed in the Hong Kong-based Ming Bao Daily last weekend. It reported that the Chinese central bank was going to buy another $200 billion in US Treasury bonds in order to help finance the Bush administration’s $700 billion bailout of Wall Street. The People’s Bank of China denied the report, but welcomed the US package and declared that China and the US “share common interests” in global financial stability.
Several analysts have commented on the dilemma facing Beijing: whether to pour more money into buying up US debt to support the American financial system or use the country’s huge currency reserves to boost the slowing domestic economy. While the regime is facing pressures at home to maintain growth, any withdrawal of Chinese funds or even a slowing down of cash injections into the US could encourage others to follow suit, with devastating consequences for the American and global economic system.
An editorial in Hong Kong’s Ta Kung Pao newspaper on October 8 warned Beijing not to fall into the trap of bailing out the US economy. Its reasons included: firstly, the US was seeking to strategically contain China and was selling arms to Taiwan; secondly, the US measures would weaken the dollar, causing further huge losses to China’s existing dollar assets; and thirdly, without coordination with other Asian countries, China could end up paying the bill, while others dumped dollars. Beijing should reduce its dollar holdings, the newspaper argued.
Former Morgan Stanley Asia chief economist Andy Xie, on the other hand, is one of the “save America” advocates. He called for China and other Asian countries to use their vast foreign currency reserves to prop up the US economy simply because so much was at stake. Writing in the financial journal Caijing on September 23, Xie argued that the US was so indebted that any domestic solution, including the $700 billion bailout, would only replace one form of debt with another. “When the shell game runs out of options, printing money is the only way out. That will eventually lead to the US dollar collapsing and hyperinflation in the US economy,” he warned. The outcome would be a global depression of “unimaginable proportions” that would consume not only the US but China as well.
To avoid “such a tragic ending,” Xie called on China, Japan, Kuwait, Saudi Arabia and the United Arab Emirates to negotiate a deal with Washington to swap their huge dollar assets for equity assets like shares. Xie admitted, however, that the ruling US financial elite was extremely unlikely to accept new Asian and Middle Eastern bosses on Wall Street. “Even though the US is the largest debtor in the world, it behaves like the largest creditor. America may need much more hardship to change their attitude,” Xie wrote.
The Financial Times explained on October 1 that China and Asia had become intimately intertwined with the American economy and thus its financial crisis. Cheap goods from China and their deflationary pressure over the past decade underwrote the cheap credit policy of the US Federal Reserve, which, in turn, encouraged the formation of highly speculative financial derivatives. The Asian banks’ huge reserves of $4.3 trillion also provided US financial markets with endless liquidity, helping to suppress interest rates, inflating the housing market and debt-driven consumption. In turn, the US provided a huge consumer market for the explosive growth of industry in China.
When the US housing bubble began in 2002, China’s exports to the US skyrocketed at double-digit annual growth rates—until the first seven months of this year, when they fell by 8.1 percent, leaving China with massive overcapacity. Several of China’s largest steel makers agreed to cut output by one fifth this month in order to prop up falling prices. Demand for steel is weakening in all three major areas—construction, home appliances and auto industries—which will also impact on global commodities prices.
China’s export sector is struggling, according to the Australian Financial Review on September 28. C.K. Yeung, vice-president of the Toys Manufacturers Association of Hong Kong, which mainly operates in Guangdong’s Pearl River Delta, said this was the toughest year since investment in China began in the early 1980s. He estimated that 10 percent of the 4,000 large toy factories in the region had shut down. Andrew Yeh, the head of the Dongguan Taiwanese Business Association, told the newspaper that in the first half of the year, 1,500 Taiwanese firms closed in Dongguan, a major manufacturing city in Guangdong.
China’s other major export hub, the Yangtze River Delta near Shanghai, is suffering similar problems. The two regions are the main motors of China’s economic growth, generating 70 percent of exports and 40 percent of property sales. Many inland provinces depend on supplying these two regions with labour and raw materials. Economic troubles in the two deltas—a falling real estate market, declining car sales and increased closures of small and medium firms—are expected to create a far wider downturn throughout China.
Most economists are no longer optimistic about China’s “decoupling” from the global economic crisis. A Morgan Stanley report in late September pointed out that as prices fall, “the likelihood of a property sector meltdown is high,” leading to insolvency among developers and impacting on Chinese banks. Credit Suisse’s Vincent Chan warned: “Suddenly you have a situation where external demand is weakened, manufacturing costs are rising and you have a property market bubble bursting. So you have a perfect-storm situation.”
Another economist, Stephen Green from Standard Chartered, wrote to his clients, asking: “China—Time to Panic?” Although he did not think so, he predicted a sharp decline of China’s growth rate by 4 percent next year, to just 7.9 percent. Other analysts are predicting even lower rates of 5-6 percent.
At the World Economic Forum in Tianjin on September 26-28, Chinese officials joined others at the international gathering of CEOs, academics and political figures in calling for “international cooperation” to avert a US financial meltdown. But behind the calls for joint action, all the major powers are jostling to shore up their own economies and strengthen their own positions internationally.
Ding Yifan, a researcher for the State Council, China’s cabinet, commented in the China Daily on September 26: “The unfolding financial crisis in the United States leads us to wonder whether this signals the end of that country’s long-established financial hegemony in the world.” While Ding pointed to opportunities for China to buy “cheap financial assets” in the US, he also expressed the fear that government bailouts of the financial markets in the US and Europe represented a turn towards protectionism, shutting the door to Chinese exports.
For all the talk of global economic cooperation, governments in the US, Europe and Asia are increasingly taking a beggar-thy-neighbour approach amid the greatest economic crisis since the 1930s. China, which is heavily dependent on huge inflows of foreign investment and exports to the major capitalist economies, may well turn out to be among the hardest hit by the current turmoil.
By John Chan
Beijing is increasingly worried about the impact of the global financial storm and looming international recession on the Chinese economy. While joining other major economies to try to stabilise American and world capitalism, the Chinese regime is also concerned at the economic, social and political stresses being generated by a sharp slowdown at home.
Yesterday the People’s Bank of China joined other major central banks around the world in an effort to steady international financial markets via coordinated interest rate cuts. More fundamentally, China continues to hold massive amounts of US debt—already more than $1 trillion—which, as well as maintaining currency exchange rates, helps to shore up the US economy.
During a trip to the UN, Chinese Premier Wen Jiabao met leading American financial figures on September 24 to express his grave concerns at the unfolding financial meltdown. Those present included Timothy Geithner, president of the New York Federal Reserve Bank; Robert Rubin, Citigroup chairman and former US Treasury Secretary and Andrew Liveris, chairman of the US-China Business Council and of Dow Chemicals.
Wen declared that the most important commodity had become “confidence” in the American economy, saying it was “more important than gold and currency”. Dismissing comparisons with the 1930s Depression, Wen insisted that the situation was different because the US was now based on high-tech industries and therefore “sound”. He declared that Beijing was willing to cooperate to maintain US financial stability because that would be “beneficial to China”.
Just how anxious China is about the US economy was revealed in the Hong Kong-based Ming Bao Daily last weekend. It reported that the Chinese central bank was going to buy another $200 billion in US Treasury bonds in order to help finance the Bush administration’s $700 billion bailout of Wall Street. The People’s Bank of China denied the report, but welcomed the US package and declared that China and the US “share common interests” in global financial stability.
Several analysts have commented on the dilemma facing Beijing: whether to pour more money into buying up US debt to support the American financial system or use the country’s huge currency reserves to boost the slowing domestic economy. While the regime is facing pressures at home to maintain growth, any withdrawal of Chinese funds or even a slowing down of cash injections into the US could encourage others to follow suit, with devastating consequences for the American and global economic system.
An editorial in Hong Kong’s Ta Kung Pao newspaper on October 8 warned Beijing not to fall into the trap of bailing out the US economy. Its reasons included: firstly, the US was seeking to strategically contain China and was selling arms to Taiwan; secondly, the US measures would weaken the dollar, causing further huge losses to China’s existing dollar assets; and thirdly, without coordination with other Asian countries, China could end up paying the bill, while others dumped dollars. Beijing should reduce its dollar holdings, the newspaper argued.
Former Morgan Stanley Asia chief economist Andy Xie, on the other hand, is one of the “save America” advocates. He called for China and other Asian countries to use their vast foreign currency reserves to prop up the US economy simply because so much was at stake. Writing in the financial journal Caijing on September 23, Xie argued that the US was so indebted that any domestic solution, including the $700 billion bailout, would only replace one form of debt with another. “When the shell game runs out of options, printing money is the only way out. That will eventually lead to the US dollar collapsing and hyperinflation in the US economy,” he warned. The outcome would be a global depression of “unimaginable proportions” that would consume not only the US but China as well.
To avoid “such a tragic ending,” Xie called on China, Japan, Kuwait, Saudi Arabia and the United Arab Emirates to negotiate a deal with Washington to swap their huge dollar assets for equity assets like shares. Xie admitted, however, that the ruling US financial elite was extremely unlikely to accept new Asian and Middle Eastern bosses on Wall Street. “Even though the US is the largest debtor in the world, it behaves like the largest creditor. America may need much more hardship to change their attitude,” Xie wrote.
The Financial Times explained on October 1 that China and Asia had become intimately intertwined with the American economy and thus its financial crisis. Cheap goods from China and their deflationary pressure over the past decade underwrote the cheap credit policy of the US Federal Reserve, which, in turn, encouraged the formation of highly speculative financial derivatives. The Asian banks’ huge reserves of $4.3 trillion also provided US financial markets with endless liquidity, helping to suppress interest rates, inflating the housing market and debt-driven consumption. In turn, the US provided a huge consumer market for the explosive growth of industry in China.
When the US housing bubble began in 2002, China’s exports to the US skyrocketed at double-digit annual growth rates—until the first seven months of this year, when they fell by 8.1 percent, leaving China with massive overcapacity. Several of China’s largest steel makers agreed to cut output by one fifth this month in order to prop up falling prices. Demand for steel is weakening in all three major areas—construction, home appliances and auto industries—which will also impact on global commodities prices.
China’s export sector is struggling, according to the Australian Financial Review on September 28. C.K. Yeung, vice-president of the Toys Manufacturers Association of Hong Kong, which mainly operates in Guangdong’s Pearl River Delta, said this was the toughest year since investment in China began in the early 1980s. He estimated that 10 percent of the 4,000 large toy factories in the region had shut down. Andrew Yeh, the head of the Dongguan Taiwanese Business Association, told the newspaper that in the first half of the year, 1,500 Taiwanese firms closed in Dongguan, a major manufacturing city in Guangdong.
China’s other major export hub, the Yangtze River Delta near Shanghai, is suffering similar problems. The two regions are the main motors of China’s economic growth, generating 70 percent of exports and 40 percent of property sales. Many inland provinces depend on supplying these two regions with labour and raw materials. Economic troubles in the two deltas—a falling real estate market, declining car sales and increased closures of small and medium firms—are expected to create a far wider downturn throughout China.
Most economists are no longer optimistic about China’s “decoupling” from the global economic crisis. A Morgan Stanley report in late September pointed out that as prices fall, “the likelihood of a property sector meltdown is high,” leading to insolvency among developers and impacting on Chinese banks. Credit Suisse’s Vincent Chan warned: “Suddenly you have a situation where external demand is weakened, manufacturing costs are rising and you have a property market bubble bursting. So you have a perfect-storm situation.”
Another economist, Stephen Green from Standard Chartered, wrote to his clients, asking: “China—Time to Panic?” Although he did not think so, he predicted a sharp decline of China’s growth rate by 4 percent next year, to just 7.9 percent. Other analysts are predicting even lower rates of 5-6 percent.
At the World Economic Forum in Tianjin on September 26-28, Chinese officials joined others at the international gathering of CEOs, academics and political figures in calling for “international cooperation” to avert a US financial meltdown. But behind the calls for joint action, all the major powers are jostling to shore up their own economies and strengthen their own positions internationally.
Ding Yifan, a researcher for the State Council, China’s cabinet, commented in the China Daily on September 26: “The unfolding financial crisis in the United States leads us to wonder whether this signals the end of that country’s long-established financial hegemony in the world.” While Ding pointed to opportunities for China to buy “cheap financial assets” in the US, he also expressed the fear that government bailouts of the financial markets in the US and Europe represented a turn towards protectionism, shutting the door to Chinese exports.
For all the talk of global economic cooperation, governments in the US, Europe and Asia are increasingly taking a beggar-thy-neighbour approach amid the greatest economic crisis since the 1930s. China, which is heavily dependent on huge inflows of foreign investment and exports to the major capitalist economies, may well turn out to be among the hardest hit by the current turmoil.
Labour government pledges up to £500 billion for Britain’s banks
Go to Original
By Jean Shaoul
It is a measure of the depth of the crisis facing the British and world economy that a pledge by the Labour government to make £500 billion available to the high street banks, failed to stem continued losses on the stock markets.
Early Wednesday morning, in one of the most far-reaching moves ever announced by a British chancellor of the exchequer, Alistair Darling pledged astronomic sums of taxpayer money both now and in the future to shore up the banks and building societies.
Capital will be made available to eight of the UK’s largest banks and building societies in return for preference shares to be held by the government. Banks will have to increase their capital by at least £25 billion, which they can borrow from the government, with an additional £25 billion available in exchange for the preference shares.
This £50 billion is dwarfed by the £200 billion made available in short-term loans from the Bank of England, up from £100 billion, and the £250 billion in loan guarantees available at commercial rates, which are meant to encourage banks to lend to each other. This total is equivalent to $880 billion- greater than the $700 billion bailout agreed by the United States government October 3. It is equal to nearly 40 percent of Britain’s gross domestic product (GDP).
Even so, the FTSE 100 stock index in London fell four percent after the measures were unveiled, with the troubled HBOS bank’s shares rising by around 25 percent—from a rock-bottom low—by the end of the day. Shares of Barclays and Standard Chartered both fell.
The Bank of England also rushed to announce a cut in the Bank Rate from 5 to 4.5 percent, as part of a coordinated move by the US Federal Reserve, the European Central Bank and similar bodies internationally. Even this did not prevent a further fall at the end of London trading to 4.92 percent.
In an earlier statement to the House of Commons on Monday, Darling also promised to review the new £50,000 guarantee limit on bank deposits after Ireland, Denmark, Greece and Germany announced guarantees on all deposits. While 98 percent of retail customers are covered by the £50,000 limit, this covers only 60 percent of all deposits by value. An extension of the limit on retail deposits would benefit the more wealthy depositors, and Britain’s banks want the guarantee to be extended to cover a wider range of deposits.
All that is being demanded in return for what amounts to a blank cheque from the government is some unspecified limits on the banks’ dividends to shareholders and on directors’ pay.
The manner in which it was decided to hand over such vast sums to the banks illustrates how Labour governs solely on behalf of the financial elite.
A fabulously wealthy layer that has amassed billions through rampant speculation has been handed immense power over the UK Treasury and tax revenues.
Yet despite the fact that the taxpayers will have to fund this unprecedented move, there was neither democratic discussion nor even a parliamentary vote on the matter. Instead, there were weeks of talks behind closed doors between the banks and the government.
Details of the bailout were widely leaked to the media and trailed on the BBC’s flagship, Newsnight on Tuesday. The package was finally announced as a done deal in a written statement issued for the City’s approval just before the London Stock Market was due to open at 800 a.m., Wednesday. Even the cabinet had not discussed it.
The chancellor had said he would inform Parliament after he had worked out a deal. In any event, such is the unanimity on all fundamental questions between all the political parties, that there will be no debate or opposition to the measure.
The rescue plan had to be hastily unveiled after confidence in Britain’s banking system, one of the most important in the world, evaporated. Shares in Britain’s high street banks had crashed on Tuesday, following Darling’s failure to announce an immediate rescue plan. HBOS had fallen by 42 percent, Royal Bank of Scotland (RBS) by 39 percent, Barclays by 9 percent and Lloyds TSB by 13 percent.
British banks, which rely more on the wholesale money markets than their European counterparts, have found it impossible to secure funding. Banks and financial institutions refuse to lend to each other without charging high interest. Large parts of the debt market have ceased to function. Even the massive injection of overnight and term liquidity by the Bank of England into the banking system has not lifted the lending freeze, as banks have hoarded the money to keep themselves solvent.
The chief executives of Britain’s largest banks had presented Darling with a long shopping list of demands, most of which have now been agreed to. But on Tuesday, with Europe’s leaders having failed to mount a coordinated rescue plan, Darling simply reiterated the government’s promise that it would do whatever was necessary to restore confidence in the banking system.
The cash injection, in return for preference shares, was a way of selling a bailout purportedly on better terms than the US Treasury’s plans to buy up at least $700 billion of toxic assets. But it was still dangerous and massively unpopular. Darling worked behind the scenes to secure the support of the opposition parties and the financial authorities.
The efforts to prettify what has been agreed should be rejected out of hand. The talk of a “partial” nationalisation of the banks by financial commentators obscures the fact that the state is taking public ownership of the banks’ liabilities. The banks will continue to be run in the interest of the financial elite. They will be subject to no direct control by government, a point that the government has confirmed.
The government’s move will not succeed in restoring confidence in the banking system. Given the weight of the financial sector in Britain, far higher than anywhere else, a comprehensive bailout package involving every UK bank and every UK deposit would be far beyond the means of the government.
To give some indication of the scale of what is involved—the assets of what are now, in many instances worthless loans of just four of the high streets banks, RBS, HSBC, Barclays and Lloyds TSB/HBOS—total €2 trillion, €1.6 trillion, €1.5 trillion and €1.4 trillion respectively. This is more than four times the value of Britain’s GDP.
While some of the most important banks and building societies will be eligible for cash injections by the government, others will be allowed to go to the wall or be taken over. In any case, the government will struggle to find the resources to fund this rescue of the biggest banks. Its coffers are empty.
According to the Institute of Fiscal Studies, this year’s budget deficit is likely to rise to £65 billion, a 13-year high that amounts to 4.4 percent of national income. The state takeovers of Northern Rock and Bradford and Bingley—set to cost taxpayers at least £130 billion—have already brought the total borrowings to GDP ratio to about 48 percent.
Further injections of public cash, into banks that are losing their value, could result in the financial insolvency of the British government itself. Even in the mid 1970s, in spite of Britain’s dire economic straits, the government was able to appeal to the International Monetary Fund for loans. Today such an escape route is no longer possible.
The banks’ raid on the Treasury will lead to the gutting of social programmes and welfare payments, the loss of hundreds of thousands of public sector jobs and the introduction of widespread user charges for public services. This will be accompanied by tax increases on working people on a massive scale.
This takes place under conditions of a deepening recession in Britain and internationally. A leaked report by the International Monetary Fund (IMF) stated that the world is heading for a “major downturn,” with Britain’s economy one of the hardest hit. The IMF has said the world faces a potentially disorderly global unwinding of debt that could precipitate “a severe adverse feedback loop between the financial system and the broader economy.” It predicts that that UK gross domestic product will shrink by 0.1 percent over the next year, having previously predicted growth of 1.6 percent.
The freeze in the money markets has already begun to spread to the real economy, with the corporate sector unable to secure loans for more than a day to shore up working capital, threatening their ability to pay their creditors and workforce. The National Institute of Economic and Social Research said that Britain is already in recession. The British Chamber of Commerce agrees and has warned of “exceptionally bad” conditions for business, with hundreds of thousands of jobs expected to go by 2009. Much worse is yet to come, as working people are forced to pay for a crisis that is not of their making by those who are directly responsible.
By Jean Shaoul
It is a measure of the depth of the crisis facing the British and world economy that a pledge by the Labour government to make £500 billion available to the high street banks, failed to stem continued losses on the stock markets.
Early Wednesday morning, in one of the most far-reaching moves ever announced by a British chancellor of the exchequer, Alistair Darling pledged astronomic sums of taxpayer money both now and in the future to shore up the banks and building societies.
Capital will be made available to eight of the UK’s largest banks and building societies in return for preference shares to be held by the government. Banks will have to increase their capital by at least £25 billion, which they can borrow from the government, with an additional £25 billion available in exchange for the preference shares.
This £50 billion is dwarfed by the £200 billion made available in short-term loans from the Bank of England, up from £100 billion, and the £250 billion in loan guarantees available at commercial rates, which are meant to encourage banks to lend to each other. This total is equivalent to $880 billion- greater than the $700 billion bailout agreed by the United States government October 3. It is equal to nearly 40 percent of Britain’s gross domestic product (GDP).
Even so, the FTSE 100 stock index in London fell four percent after the measures were unveiled, with the troubled HBOS bank’s shares rising by around 25 percent—from a rock-bottom low—by the end of the day. Shares of Barclays and Standard Chartered both fell.
The Bank of England also rushed to announce a cut in the Bank Rate from 5 to 4.5 percent, as part of a coordinated move by the US Federal Reserve, the European Central Bank and similar bodies internationally. Even this did not prevent a further fall at the end of London trading to 4.92 percent.
In an earlier statement to the House of Commons on Monday, Darling also promised to review the new £50,000 guarantee limit on bank deposits after Ireland, Denmark, Greece and Germany announced guarantees on all deposits. While 98 percent of retail customers are covered by the £50,000 limit, this covers only 60 percent of all deposits by value. An extension of the limit on retail deposits would benefit the more wealthy depositors, and Britain’s banks want the guarantee to be extended to cover a wider range of deposits.
All that is being demanded in return for what amounts to a blank cheque from the government is some unspecified limits on the banks’ dividends to shareholders and on directors’ pay.
The manner in which it was decided to hand over such vast sums to the banks illustrates how Labour governs solely on behalf of the financial elite.
A fabulously wealthy layer that has amassed billions through rampant speculation has been handed immense power over the UK Treasury and tax revenues.
Yet despite the fact that the taxpayers will have to fund this unprecedented move, there was neither democratic discussion nor even a parliamentary vote on the matter. Instead, there were weeks of talks behind closed doors between the banks and the government.
Details of the bailout were widely leaked to the media and trailed on the BBC’s flagship, Newsnight on Tuesday. The package was finally announced as a done deal in a written statement issued for the City’s approval just before the London Stock Market was due to open at 800 a.m., Wednesday. Even the cabinet had not discussed it.
The chancellor had said he would inform Parliament after he had worked out a deal. In any event, such is the unanimity on all fundamental questions between all the political parties, that there will be no debate or opposition to the measure.
The rescue plan had to be hastily unveiled after confidence in Britain’s banking system, one of the most important in the world, evaporated. Shares in Britain’s high street banks had crashed on Tuesday, following Darling’s failure to announce an immediate rescue plan. HBOS had fallen by 42 percent, Royal Bank of Scotland (RBS) by 39 percent, Barclays by 9 percent and Lloyds TSB by 13 percent.
British banks, which rely more on the wholesale money markets than their European counterparts, have found it impossible to secure funding. Banks and financial institutions refuse to lend to each other without charging high interest. Large parts of the debt market have ceased to function. Even the massive injection of overnight and term liquidity by the Bank of England into the banking system has not lifted the lending freeze, as banks have hoarded the money to keep themselves solvent.
The chief executives of Britain’s largest banks had presented Darling with a long shopping list of demands, most of which have now been agreed to. But on Tuesday, with Europe’s leaders having failed to mount a coordinated rescue plan, Darling simply reiterated the government’s promise that it would do whatever was necessary to restore confidence in the banking system.
The cash injection, in return for preference shares, was a way of selling a bailout purportedly on better terms than the US Treasury’s plans to buy up at least $700 billion of toxic assets. But it was still dangerous and massively unpopular. Darling worked behind the scenes to secure the support of the opposition parties and the financial authorities.
The efforts to prettify what has been agreed should be rejected out of hand. The talk of a “partial” nationalisation of the banks by financial commentators obscures the fact that the state is taking public ownership of the banks’ liabilities. The banks will continue to be run in the interest of the financial elite. They will be subject to no direct control by government, a point that the government has confirmed.
The government’s move will not succeed in restoring confidence in the banking system. Given the weight of the financial sector in Britain, far higher than anywhere else, a comprehensive bailout package involving every UK bank and every UK deposit would be far beyond the means of the government.
To give some indication of the scale of what is involved—the assets of what are now, in many instances worthless loans of just four of the high streets banks, RBS, HSBC, Barclays and Lloyds TSB/HBOS—total €2 trillion, €1.6 trillion, €1.5 trillion and €1.4 trillion respectively. This is more than four times the value of Britain’s GDP.
While some of the most important banks and building societies will be eligible for cash injections by the government, others will be allowed to go to the wall or be taken over. In any case, the government will struggle to find the resources to fund this rescue of the biggest banks. Its coffers are empty.
According to the Institute of Fiscal Studies, this year’s budget deficit is likely to rise to £65 billion, a 13-year high that amounts to 4.4 percent of national income. The state takeovers of Northern Rock and Bradford and Bingley—set to cost taxpayers at least £130 billion—have already brought the total borrowings to GDP ratio to about 48 percent.
Further injections of public cash, into banks that are losing their value, could result in the financial insolvency of the British government itself. Even in the mid 1970s, in spite of Britain’s dire economic straits, the government was able to appeal to the International Monetary Fund for loans. Today such an escape route is no longer possible.
The banks’ raid on the Treasury will lead to the gutting of social programmes and welfare payments, the loss of hundreds of thousands of public sector jobs and the introduction of widespread user charges for public services. This will be accompanied by tax increases on working people on a massive scale.
This takes place under conditions of a deepening recession in Britain and internationally. A leaked report by the International Monetary Fund (IMF) stated that the world is heading for a “major downturn,” with Britain’s economy one of the hardest hit. The IMF has said the world faces a potentially disorderly global unwinding of debt that could precipitate “a severe adverse feedback loop between the financial system and the broader economy.” It predicts that that UK gross domestic product will shrink by 0.1 percent over the next year, having previously predicted growth of 1.6 percent.
The freeze in the money markets has already begun to spread to the real economy, with the corporate sector unable to secure loans for more than a day to shore up working capital, threatening their ability to pay their creditors and workforce. The National Institute of Economic and Social Research said that Britain is already in recession. The British Chamber of Commerce agrees and has warned of “exceptionally bad” conditions for business, with hundreds of thousands of jobs expected to go by 2009. Much worse is yet to come, as working people are forced to pay for a crisis that is not of their making by those who are directly responsible.
Rate cuts, UK bank bailout fail to stem global financial panic
Go to Original
By Barry Grey
World stock exchanges continued to plummet Wednesday despite unprecedented measures aimed at unfreezing credit markets and restoring confidence in the financial system.
Britain’s announcement of an $880 billion bank bailout and coordinated interest rate cuts by central banks in North America, Europe and Asia were widely seen in financial markets as desperation measures that would do little to stabilize a banking system in the throes of the deepest crisis since the Great Depression.
The trading day opened with frenzied selling on Asian stock exchanges. Japan’s Nikkei index lost 9.4 percent, its biggest single-day fall since the global stock market crash of October 1987. Hong Kong’s Hang Seng declined 8.2 percent, the Mumbai exchange fell 7.3 percent and markets in Indonesia had to close early after plunging 10 percentage points.
Japanese auto stocks fell sharply amid fears of a world recession and severe contraction in Japanese export markets. Toyota, Nissan and Honda all fell more than 10 percent.
Russia’s MISEX index fell 13 percent in the first minutes of trading and the Moscow exchange was suspended shortly thereafter.
European markets opened sharply lower, rallied somewhat after the announcement of coordinated interest rate cuts by the US Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank and the central banks of Switzerland, Sweden and China, and then resumed their downward spiral.
The pan-European Dow Jones Stoxx 600 Index ended the day down 6 percent. London’s FTSE 100 Index brushed aside the massive bailout package announced by the government and plunged 5.2 percent. France’s CAC-40 Index declined 7.4 percent and Germany’s DAX Index fell 5.9 percent.
European bank stocks continued to suffer large losses. Shares in Germany’s Deutsche Bank sank by 10.6 percent, France’s Societe Generale lost 9.8 percent and Credit Agricole fell 8.2 percent.
In the US, share prices gyrated feverishly throughout the day, following a 508 point drop in the Dow Jones Industrial Average on Tuesday. By the close of trading, all three major indexes were down sharply. The Dow ended with a loss of 189 points (minus 2 percent), the Nasdaq Composite Index fell 14 points (0.8 percent) and the Standard & Poor’s 500 Index fell by 11 points (1 percent).
Major bank stocks continued to suffer big losses, with Bank of America shares declining 7 percent and Citigroup losing nearly 5 percent. Indicative of the mounting toll of the banking crisis on the “real” economy, the giant aluminum maker Alcoa suffered a loss of nearly 12 percent.
It was the sixth straight day of declines on the US markets. Over that period, the Dow has lost 14.7 percent.
Since the passage of the $700 billion government bailout of the banks last Friday, the Dow has lost nearly 1,200 points. The downward spiral has not been stemmed by further emergency measures taken by the government, including a doubling and redoubling of Federal Reserve emergency loan facilities to the banks, bringing the total to $900 billion, and the Fed’s unprecedented announcement Tuesday that it would begin buying up short-term commercial debt for all types of businesses.
As the New York Times put it on Tuesday: “When the White House brought out its $700 billion rescue plan two weeks ago, its sheer size was meant to soothe the global financial system, restoring trust and confidence. Three days after the plan was approved, it looks like a pebble tossed into a churning sea.”
Bloomberg.com noted that US stock indexes are heading for their biggest annual decline since 1937.
Speaking of the markets’ dismissal of the coordinated interest rate cuts on Wednesday, Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said, “Officials didn’t even have time to pat themselves on the back before the market said, ‘So what? This doesn’t address the problem.’” He continued, “Every time officials do something that doesn’t work, it breeds even greater anxiety.”
Market panic was intensified by a dire economic forecast issued Wednesday by the International Monetary Fund (IMF). In its biannual World Economic Outlook, timed to coincide with the annuals meetings of the IMF and World Bank in Washington DC this weekend, the organization wrote: “The global economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s.” It added, “After years of strong growth, the world economy is decelerating quickly.”
The IMF revised downward its July forecast for global economic growth in 2009 to 3.0 percent. It said the major industrialized countries of the G-7 group would be among the hardest hit economies, including the United States, which it called the “center of the intensifying global financial storm.”
The IMF forecasts economic growth in the US to grind to a halt in 2009, estimating an increase of 0.1 percent. This means a dramatic rise in unemployment.
The IMF forecasts sharply lower growth in most of Europe, with an actual contraction in Britain, Italy and Spain. It also anticipates slower growth in China, India and the so-called developing world.
The report suggests that the recession will be protracted, stating that “the pickup is likely to be unusually gradual, held back by continued financial market deleveraging.”
Data on retail sales in September provided further evidence of mounting recessionary trends in the US. With the exception of discount chains such as Wal-Mart, major retailers registered sharp declines, pointing to what some analysts are predicting will be the worst holiday sale season in 17 years.
JC Penney, the third largest department store chain, reported a 12.4 percent drop in sales. Some 63 percent of retailers who reported sales results on Wednesday fell short of already lowered expectations.
The National Association of Realtors reported a 7.4 percent increase in pending home sales for August, but that unexpected increase was largely due, in the words of one economist, to “vulture investors buying foreclosed homes.” The biggest increase, a jump of 18.4 percent, came in the West, which has had the highest foreclosure rate.
One factor that is compounding the crisis on the markets is a growing lack of confidence in the major central banks and government policy makers, who increasingly exhibit a combination of desperation and perplexity. A stunning example was the reaction by US markets to a speech given Wednesday afternoon by Treasury Secretary Henry Paulson.
Paulson delivered what he called an update on the bailout plan for the banks which he had authored. Meant to reassure the markets in the final hour of trading, his remarks had the exact opposite impact.
He asserted that the US is “a strong and wealthy nation, with the resources to address the needs we face.” But in the course of his remarks, he noted that “some financial institutions will fail” and concluded by warning against hopes for a quick resolution of the crisis. “But patience is also needed,” he said, “because the turmoil will not end quickly and significant challenges remain ahead. Neither passage of this new law nor the implementation of these initiatives will bring an immediate end to current difficulties.”
In a brief question-and-answer session following his prepared remarks, Paulson brushed off a query as to whether a meeting to be held Friday in Washington of G-7 finance ministers and central bankers would produce a more coordinated international response to the crisis. “It would make no sense to have identical policies,” he said.
When Paulson began speaking, the Dow was up 150 points. In the course of his remarks it turned downward and continued to fall until the closing bell.
By Barry Grey
World stock exchanges continued to plummet Wednesday despite unprecedented measures aimed at unfreezing credit markets and restoring confidence in the financial system.
Britain’s announcement of an $880 billion bank bailout and coordinated interest rate cuts by central banks in North America, Europe and Asia were widely seen in financial markets as desperation measures that would do little to stabilize a banking system in the throes of the deepest crisis since the Great Depression.
The trading day opened with frenzied selling on Asian stock exchanges. Japan’s Nikkei index lost 9.4 percent, its biggest single-day fall since the global stock market crash of October 1987. Hong Kong’s Hang Seng declined 8.2 percent, the Mumbai exchange fell 7.3 percent and markets in Indonesia had to close early after plunging 10 percentage points.
Japanese auto stocks fell sharply amid fears of a world recession and severe contraction in Japanese export markets. Toyota, Nissan and Honda all fell more than 10 percent.
Russia’s MISEX index fell 13 percent in the first minutes of trading and the Moscow exchange was suspended shortly thereafter.
European markets opened sharply lower, rallied somewhat after the announcement of coordinated interest rate cuts by the US Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank and the central banks of Switzerland, Sweden and China, and then resumed their downward spiral.
The pan-European Dow Jones Stoxx 600 Index ended the day down 6 percent. London’s FTSE 100 Index brushed aside the massive bailout package announced by the government and plunged 5.2 percent. France’s CAC-40 Index declined 7.4 percent and Germany’s DAX Index fell 5.9 percent.
European bank stocks continued to suffer large losses. Shares in Germany’s Deutsche Bank sank by 10.6 percent, France’s Societe Generale lost 9.8 percent and Credit Agricole fell 8.2 percent.
In the US, share prices gyrated feverishly throughout the day, following a 508 point drop in the Dow Jones Industrial Average on Tuesday. By the close of trading, all three major indexes were down sharply. The Dow ended with a loss of 189 points (minus 2 percent), the Nasdaq Composite Index fell 14 points (0.8 percent) and the Standard & Poor’s 500 Index fell by 11 points (1 percent).
Major bank stocks continued to suffer big losses, with Bank of America shares declining 7 percent and Citigroup losing nearly 5 percent. Indicative of the mounting toll of the banking crisis on the “real” economy, the giant aluminum maker Alcoa suffered a loss of nearly 12 percent.
It was the sixth straight day of declines on the US markets. Over that period, the Dow has lost 14.7 percent.
Since the passage of the $700 billion government bailout of the banks last Friday, the Dow has lost nearly 1,200 points. The downward spiral has not been stemmed by further emergency measures taken by the government, including a doubling and redoubling of Federal Reserve emergency loan facilities to the banks, bringing the total to $900 billion, and the Fed’s unprecedented announcement Tuesday that it would begin buying up short-term commercial debt for all types of businesses.
As the New York Times put it on Tuesday: “When the White House brought out its $700 billion rescue plan two weeks ago, its sheer size was meant to soothe the global financial system, restoring trust and confidence. Three days after the plan was approved, it looks like a pebble tossed into a churning sea.”
Bloomberg.com noted that US stock indexes are heading for their biggest annual decline since 1937.
Speaking of the markets’ dismissal of the coordinated interest rate cuts on Wednesday, Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said, “Officials didn’t even have time to pat themselves on the back before the market said, ‘So what? This doesn’t address the problem.’” He continued, “Every time officials do something that doesn’t work, it breeds even greater anxiety.”
Market panic was intensified by a dire economic forecast issued Wednesday by the International Monetary Fund (IMF). In its biannual World Economic Outlook, timed to coincide with the annuals meetings of the IMF and World Bank in Washington DC this weekend, the organization wrote: “The global economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s.” It added, “After years of strong growth, the world economy is decelerating quickly.”
The IMF revised downward its July forecast for global economic growth in 2009 to 3.0 percent. It said the major industrialized countries of the G-7 group would be among the hardest hit economies, including the United States, which it called the “center of the intensifying global financial storm.”
The IMF forecasts economic growth in the US to grind to a halt in 2009, estimating an increase of 0.1 percent. This means a dramatic rise in unemployment.
The IMF forecasts sharply lower growth in most of Europe, with an actual contraction in Britain, Italy and Spain. It also anticipates slower growth in China, India and the so-called developing world.
The report suggests that the recession will be protracted, stating that “the pickup is likely to be unusually gradual, held back by continued financial market deleveraging.”
Data on retail sales in September provided further evidence of mounting recessionary trends in the US. With the exception of discount chains such as Wal-Mart, major retailers registered sharp declines, pointing to what some analysts are predicting will be the worst holiday sale season in 17 years.
JC Penney, the third largest department store chain, reported a 12.4 percent drop in sales. Some 63 percent of retailers who reported sales results on Wednesday fell short of already lowered expectations.
The National Association of Realtors reported a 7.4 percent increase in pending home sales for August, but that unexpected increase was largely due, in the words of one economist, to “vulture investors buying foreclosed homes.” The biggest increase, a jump of 18.4 percent, came in the West, which has had the highest foreclosure rate.
One factor that is compounding the crisis on the markets is a growing lack of confidence in the major central banks and government policy makers, who increasingly exhibit a combination of desperation and perplexity. A stunning example was the reaction by US markets to a speech given Wednesday afternoon by Treasury Secretary Henry Paulson.
Paulson delivered what he called an update on the bailout plan for the banks which he had authored. Meant to reassure the markets in the final hour of trading, his remarks had the exact opposite impact.
He asserted that the US is “a strong and wealthy nation, with the resources to address the needs we face.” But in the course of his remarks, he noted that “some financial institutions will fail” and concluded by warning against hopes for a quick resolution of the crisis. “But patience is also needed,” he said, “because the turmoil will not end quickly and significant challenges remain ahead. Neither passage of this new law nor the implementation of these initiatives will bring an immediate end to current difficulties.”
In a brief question-and-answer session following his prepared remarks, Paulson brushed off a query as to whether a meeting to be held Friday in Washington of G-7 finance ministers and central bankers would produce a more coordinated international response to the crisis. “It would make no sense to have identical policies,” he said.
When Paulson began speaking, the Dow was up 150 points. In the course of his remarks it turned downward and continued to fall until the closing bell.
The Surge That Failed
Go to Original
By Anand Gopal
Afghanistan under the Bombs
By Anand Gopal
Afghanistan under the Bombs
A bit past midnight on a balmy night in late August, Hedayatullah awoke to a deafening blast. He stumbled out of bed and heard angry voices drawing closer. Suddenly, his bedroom doors banged open and dozens of silhouetted figures burst in, some shouting in a strange language.
The intruders blindfolded Hedayatullah and, screaming with fury, forced him to the ground. An Afghan voice told him not to move or speak, or he would be killed. He listened for sounds from the next room, where his brother Noorullah slept with his family. He could hear his nephew, eight months old, crying hysterically. Then came the sound of an automatic rifle, after which his nephew fell silent.
The rest of the family -- 18 people in all, including aunts, uncles, and cousins -- was herded outside into the darkness. The Afghan voice explained to Hedayatullah’s terrified mother, "We are the Afghan National Army, here to accompany the American military. The Americans have killed one of your sons and his two children. They also shot his wife and they’re taking her to the hospital."
"Why?" Hedayatullah’s mother stammered.
"There is no why," the soldier replied. When she heard this, she started screaming, slamming her fists into her chest in anguish. The Afghan soldiers left her and loaded Hedayatullah and his cousin into the back of a military van, after which they drove off with an American convoy into the black of night.
The next day, the Afghan forces released Hedayatullah and his cousin, calling the whole raid a mistake. However, Noorullah’s wife, months pregnant, never came home: She died on the way to the hospital.
Surging in Afghanistan
When, decades from now, historians compile the record of this Afghan war, they will date the Afghan version of the surge -- the now trendy injection of large numbers of troops to resuscitate a flagging war effort -- to sometime in early 2007. Then, a growing insurgency was causing visible problems for U.S. and NATO forces in certain pockets in the southern parts of the country, long a Taliban stronghold. In response, military planners dramatically beefed up the international presence, raising the number of troops over the following 18 months by 20,000, a 45% jump.
During this period, however, the violence also jumped -- by 50%. This shouldn’t be surprising. More troops meant more targets for Taliban fighters and suicide bombers. In response, the international forces retaliated with massive aerial bombing campaigns and large-scale house raids. The number of civilians killed in the process skyrocketed. In the fifteen months of this surge, more civilians have been killed than in the previous four years combined.
During the same period, the country descended into a state of utter dereliction -- no jobs, very little reconstruction, and ever less security. In turn, the rising civilian death toll and the decaying economy proved a profitable recipe for the Taliban, who recruited significant numbers of new fighters. They also won the sympathy of Afghans who saw them as the lesser of two evils. Once confined to the deep Afghan south, today the insurgents operate openly right at the doorstep of Kabul, the capital.
This last surge, little noted by the media, failed miserably, but Washington is now planning another one, even as Afghanistan slips away. More boots on the ground, though, will do little to address the real causes of this country’s unfolding tragedy.
Revenge and the Taliban
One day, as Zubair was walking home, he noticed that the carpet factory near his house in the southern province of Ghazni was silent. That’s strange, he thought, because he could usually hear the din of spinning looms as he approached. As he rounded the corner, he saw a crowd of people, villagers and factory workers, gathered around his destroyed house. An American bomb had flattened it into a pancake of cement blocks and pulverized bricks. He ran toward the scene. It was only when he shoved his way through the crowd and up to the wreckage that he actually saw it -- his mother’s severed head lying amid mangled furniture.
He didn’t scream. Instead, the sight induced a sort of catatonia; he picked up the head, cradled it in his arms, and started walking aimlessly. He carried on like this for days, until tribal elders pried the head from his hands and convinced him to deal with his loss more constructively. He decided he would get revenge by becoming a suicide bomber and inflicting a loss on some American family as painful as the one he had just suffered.
When one decides to become a suicide bomber, it is pretty easy to find the Taliban. In Zubair’s case he just asked a relative to direct him to the nearest Talib; every village in the country’s south and east has at least a few. He found them and he trained -- yes, suicide bombing requires training -- for some time and then he was fitted with the latest model suicide vest. One morning, he made his way, as directed, towards an office building where Americans advisors were training their Afghan counterparts, but before he could detonate his vest, a pair of sharp-eyed intelligence officers spotted him and wrestled him to the ground. Zubair now spends his days in an Afghan prison.
A poll of 42 Taliban fighters by the Canadian Globe and Mail newspaper earlier this year revealed that 12 had seen family members killed in air strikes, and six joined the insurgency after such attacks. Far more who don’t join offer their support.
Under the Bombs
In the muddied outskirts of Kabul, an impromptu neighborhood has been sprouting, full of civilians fleeing the regular Allied aerial bombardments in the Afghan countryside. Sherafadeen Sadozay, a poor farmer from the south, spoke for many there when he told me that he had once had no opinion of the United States. Then, one day, a payload from an American sortie split his house in two, eviscerating his wife and three children. Now, he says, he’d rather have the Taliban back in power than nervously eye the skies every day.
Even when the bombs don’t fall, it’s quite dangerous to be an Afghan. Journalist Jawed Ahmad was on assignment for Canadian Television in the southern city of Kandahar when American troops stopped him. In his possession, they found contact numbers to the cell phones of various Taliban fighters -- something every good journalist in the country has -- and threw him into prison, not to be heard from for almost a year. During interrogation, Ahmad says that American jailors kicked him, smashed his head into a table, and at one point prevented him from sleeping for nine days. They kept him standing on a snowy runway for six hours without shoes. Twice he fainted and twice the soldiers forced him to stand up again. After 11 months of detention, military authorities gave him a letter stating that he was not a threat to the U.S. and released him.
Starving in Kabul
If you’re walking his street, there isn’t a single day when you won’t see Zayainullah. For as long as he can remember, the 11 year-old has perched on the sidewalk at one of Kabul’s busiest intersections. Zayainullah has only one arm; the Taliban blew the other one away when he was a child. He uses this arm to beg for handouts, quietly in the mornings, more desperately as the day goes on. Both his parents are dead so he lives with his aunt, a widow. Given the mores of modern-day Afghanistan, she can’t work because a woman needs a man’s sanction to leave the house. So she puts young Zayainullah on the street as her sole breadwinner. If he comes home empty-handed she beats him, sometimes until he can no longer move.
He sits there, shirtless, with a heaving, rounded belly -- distended from severe malnutrition -- as scores of other beggars and pedestrians stream by him. No one really notices him though, because poverty has become endemic in this country.
Afghanistan is now one of the poorest countries on the planet. It takes its place among desperate, destitute nations like Burkina Faso and Somalia whenever any international organization bothers to measure. The official unemployment rate, last calculated in 2005, was 40% percent. According to recent estimates, it may today reach as high as 80% in some parts of the country.
Approximately 45% of the population is now unable to purchase enough food to guarantee bare minimum health levels, according to the Brookings Institution. This winter, Afghan officials claim that hunger may kill up to 80% of the population in some northern provinces caught in a vicious drought. Reports are emerging of parents selling their children simply to make ends meet. In one district of the southern province of Ghazni last spring things got so bad that villagers started eating grass. Locals say that after a harsh winter and almost no food, they had no choice.
Kabul itself lies in tatters. Roads have gone unpaved since 2001. Massive craters from decades of war blot the capital city. Poor Afghans live in crumbling warrens with no electricity and often without safe drinking water. Kabul, a city designed for about 800,000 people, now holds more than four million, mostly squeezed into informal settlements and squatters’ shacks.
Washington spends about $100 million a day on this war -- close to $36 billion a year -- but only five cents of every dollar actually goes towards aid. From this paltry sum, the Agency Coordinating Body for Afghan Relief found that "a staggering 40 percent has returned to donor countries in corporate profits and salaries." The economy is so underdeveloped that opium production accounts for more than half of the country’s gross domestic product.
What little money does go for reconstruction is handed over to U.S. multinationals who then subcontract out to Afghan partners and cut corners every step of the way. As a result, the U.N. ranks the country as the fifth least-developed in the world -- a one-position drop from 2004.
The government and coalition forces may not bring jobs to Afghanistan, but the Taliban does. The insurgents pay for fighters -- in some cases, up to $200 a month, a windfall in a country where 42% of the population earns less than $14 a month. When a textile factory in Kandahar laid off 2,000 workers in September, most of them joined the Taliban. And that district in Ghazni where locals were reduced to eating grass? It is now a Taliban stronghold.
Biking in Kabul
A spate of suicide bombings and high-profile attacks in recent years have turned Kabul into a sort of garrison state, with roadblocks and checkpoints clogging many of the city’s main arteries. The traffic is, at times, unbearable, so I bought a new motorbike, an Iranian import that can adroitly weave through traffic. I was puttering along one day recently when a police commander stopped me.
"That’s a nice bike," he said.
"Thank you," I replied.
"Is it new?"
"Yes."
"I’d like to have it. Get off."
I stared at him in disbelief, not quite grasping at first that he was deadly serious. Then I began threatening him, saying I’d call a certain influential friend if he laid a finger on the bike. That finally hit home and he stepped back, waving me on.
Journalists may have influential friends, but ordinary Afghans are usually not so lucky. Locals tend to fear the neighborhood police as much as the many criminals who prowl Kabul’s streets. The notoriously corrupt police force is just one face of a government that much of the population has come to loathe.
Police are known to rob passengers at checkpoints. Many of the country’s leading members of parliament and cabinet officials sport long, bloody records of human rights abuses. Rapists and serious criminals regularly bribe their way out of prison. Warlords and militia commanders run wild in the north, regularly raping young girls and snatching the land of villagers with impunity. Earlier this year newspapers revealed that President Hamid Karzai pardoned a pair of such militiamen accused of bayonet-raping a young woman.
What Karzai does hardly matters, though. After all, his government barely functions. Most of the country is carved up into fiefdoms run by small-time commanders. A U.S. intelligence report in the spring of 2008 estimated that the central government then controlled just 30% of the country, and many say even that is now an optimistic assessment.
Drive a few miles outside Kabul and the roads are controlled by bandits, off-duty cops, or anyone else with a gun and an eye for a quick buck. The Karzai government’s popularity has plummeted to such levels that, believe it or not, many Afghans in Kabul wax nostalgic for the days of Dr. Mohammad Najibullah, the country’s last Communist dictator. "That government was cruel and indifferent, but at least they gave us something," an Afghan friend typically told me. The Karzai government provides almost no social services, expending all its efforts just trying to keep itself together.
Shadow Government
Power abhors a vacuum, and so, in those areas where central government rule has crumbled, the Islamic Emirate of Afghanistan -- the Taliban government -- is rising in its place. In Wardak, a province bordering Kabul Province, the Taliban has a stable foothold, complete with a shadow government of mayors and police chiefs. In Logar, another of Kabul’s neighboring provinces, some "government-controlled" areas consist of the home of the district head, the NATO installation down the road -- and nothing else.
With the rise of the Taliban in these areas comes their notorious brand of justice. Shadow courts now dispense Taliban-style draconian judgments and punishments in many districts and ever more locals are turning to them to settle disputes, either out of fear or because they are far more efficient than the corrupt government courts. The Taliban recently chopped off the ears of a schoolteacher in Zabul province for working for the government. They gunned down a popular drummer in Ghazni simply for playing music in public. Even the infamous public executions are back. The Taliban recently invited journalists to watch the execution of a pair of women on prostitution charges.
The Taliban are as uninterested in social services and human rights as the Karzai government or the international forces, but they know how to turn a world of poverty, insecurity, and death from laser-guided missiles to their advantage. This is how the Islamic Emirate spreads, like so many weeds at first, poking out of areas where the government has failed. As the central government spins towards irrelevancy, the whole south and east of Afghanistan is becoming a thicket of Taliban before our very eyes.
A War to be Lost
One night the Taliban raided a police check post near my Kabul home, killing three policemen. The following morning, when a police contingent arrived on the scene to investigate, a bomb that the rebels had cleverly hidden at the site exploded and killed two more of them. I arrived shortly afterwards to find pieces of charred flesh littering the ground and a mangled, burnt out police van sitting overturned on a pile of rubble.
The raid didn’t make much news at the time, but it was actually the deepest the insurgents had penetrated the capital since they were overthrown seven years ago. They have dispatched many individual suicide bombers into the capital and rocketed it as well from time to time, but never had they marched in as an attacking force on foot. When I told an Afghan colleague that I couldn’t believe the Taliban were coming into Kabul this way, he responded: "Coming? They’ve been here. They were just waiting for the government and the U.S. to fail."
Failure is a notion now preoccupying the Western leadership of this war, which is why they are scrambling for yet another "surge" solution.
Of course, the Taliban won’t be capturing Kabul anytime soon; the international forces are much too powerful to topple militarily. But the Americans can’t defeat the Taliban either; the guerrillas are too deeply rooted in a country scarred by no jobs, no security, and no hope. The result is a war of attrition, with the Americans planning to pour yet more fuel on the flames by throwing in more soldiers next year.
This is a war to be won by constructing roads, creating jobs, cleaning up the government, and giving Afghans something they’ve had preciously little of in the last 30 years: hope. However, hope is fading fast here, and that’s a fact Washington can ill afford to ignore; for once the Afghans lose all hope, the Americans will have lost this war.
Inside Account of US Eavesdropping on Americans
Go to Original
by Brian Ross, Vic Walter, and Anna Schecter
U.S. Officers' "Phone Sex" Intercepted, Recorded, Shared Across NSA Listening Post
by Brian Ross, Vic Walter, and Anna Schecter
U.S. Officers' "Phone Sex" Intercepted, Recorded, Shared Across NSA Listening Post
Despite pledges by President George W. Bush and American intelligence officials to the contrary, hundreds of US citizens overseas have been eavesdropped on as they called friends and family back home, according to two former military intercept operators who worked at the giant National Security Agency (NSA) center in Fort Gordon, Georgia.
"These were just really everyday, average, ordinary Americans who happened to be in the Middle East, in our area of intercept and happened to be making these phone calls on satellite phones," said Adrienne Kinne, a 31-year old US Army Reserves Arab linguist assigned to a special military program at the NSA’s Back Hall at Fort Gordon from November 2001 to 2003.
Watch the video.
Kinne described the contents of the calls as "personal, private things with Americans who are not in any way, shape or form associated with anything to do with terrorism."
She said US military officers, American journalists and American aid workers were routinely intercepted and "collected on" as they called their offices or homes in the United States.
Another intercept operator, former Navy Arab linguist, David Murfee Faulk, 39, said he and his fellow intercept operators listened into hundreds of Americans picked up using phones in Baghdad’s Green Zone from late 2003 to November 2007.
"Calling home to the United States, talking to their spouses, sometimes their girlfriends, sometimes one phone call following another," said Faulk.
The accounts of the two former intercept operators, who have never met and did not know of the other’s allegations, provide the first inside look at the day to day operations of the huge and controversial US terrorist surveillance program.
"There is a constant check to make sure that our civil liberties of our citizens are treated with respect," said President Bush at a news conference this past February.
But the accounts of the two whistleblowers, which could not be independently corroborated, raise serious questions about how much respect is accorded those Americans whose conversations are intercepted in the name of fighting terrorism.
US Soldier’s ’Phone Sex’ Intercepted, Shared
Faulk says he and others in his section of the NSA facility at Fort Gordon routinely shared salacious or tantalizing phone calls that had been intercepted, alerting office mates to certain time codes of "cuts" that were available on each operator’s computer.
"Hey, check this out," Faulk says he would be told, "there’s good phone sex or there’s some pillow talk, pull up this call, it’s really funny, go check it out. It would be some colonel making pillow talk and we would say, ’Wow, this was crazy’," Faulk told ABC News.
Faulk said he joined in to listen, and talk about it during breaks in Back Hall’s "smoke pit," but ended up feeling badly about his actions.
"I feel that it was something that the people should not have done. Including me," he said.
In testimony before Congress, then-NSA director Gen. Michael Hayden, now director of the CIA, said private conversations of Americans are not intercepted.
"It’s not for the heck of it. We are narrowly focused and drilled on protecting the nation against al Qaeda and those organizations who are affiliated with it," Gen. Hayden testified.
He was asked by Senator Orrin Hatch (R-UT), "Are you just doing this because you just want to pry into people’s lives?"
"No, sir," General Hayden replied.
Asked for comment about the ABC News report and accounts of intimate and private phone calls of military officers being passed around, a US intelligence official said "all employees of the US government" should expect that their telephone conversations could be monitored as part of an effort to safeguard security and "information assurance."
"They certainly didn’t consent to having interceptions of their telephone sex conversations being passed around like some type of fraternity game," said Jonathon Turley, a constitutional law professor at George Washington University who has testified before Congress on the country’s warrantless surveillance program.
"This story is to surveillance law what Abu Ghraib was to prison law," Turley said.
Listening to Aid Workers
NSA awarded Adrienne Kinne a NSA Joint Service Achievement Medal in 2003 at the same time she says she was listening to hundreds of private conversations between Americans, including many from the International Red Cross and Doctors without Borders.
"We knew they were working for these aid organizations," Kinne told ABC News. "They were identified in our systems as ’belongs to the International Red Cross’ and all these other organizations. And yet, instead of blocking these phone numbers we continued to collect on them," she told ABC News.
A spokesman for Doctors Without Borders, Michael Goldfarb, said: "The abuse of humanitarian action through intelligence gathering for military or political objectives, threatens the ability to assist populations and undermines the safety of humanitarian aid workers."
Both Kinne and Faulk said their military commanders rebuffed questions about listening in to the private conversations of Americans talking to Americans.
"It was just always, that , you know, your job is not to question. Your job is to collect and pass on the information," Kinne said.
Some times, Kinne and Faulk said, the intercepts helped identify possible terror planning in Iraq and saved American lives.
"IED’s were disarmed before they exploded, that people who were intending to harm US forces were captured ahead of time," Faulk said.
NSA job evaluation forms show he regularly received high marks for job performance. Faulk left his job as a newspaper reporter in Pittsburgh to join the Navy after 9/11.
Kinne says the success stories underscored for her the waste of time spent listening to innocent Americans, instead of looking for the terrorist needle in the haystack.
"By casting the net so wide and continuing to collect on Americans and aid organizations, it’s almost like they’re making the haystack bigger and it’s harder to find that piece of information that might actually be useful to somebody," she said. "You’re actually hurting our ability to effectively protect our national security."
The NSA: "The Shadow Factory"
Both former intercept operators came forward at first to speak with investigative journalist Jim Bamford for a book on the NSA, "The Shadow Factory," to be published next week.
"It’s extremely rare," said Bamford, who has written two previous books on the NSA, including the landmark "Puzzle Palace" which first revealed the existence of the super secret spy agency.
"Both of them felt that what they were doing was illegal and improper, and immoral, and it shouldn’t be done, and that’s what forces whistleblowers."
A spokesman for General Hayden, Mark Mansfield, said: "At NSA, the law was followed assiduously. The notion that General Hayden sanctioned or tolerated illegalities of any sort is ridiculous on its face."The director of the NSA, Lt. General Keith B. Alexander, declined to directly answer any of the allegations made by the whistleblowers.
In a written statement, Gen. Alexander said: "We have been entrusted to protect and defend the nation with integrity, accountability, and respect for the law. As Americans, we take this obligation seriously. Our employees work tirelessly for the good of the nation, and serve this country proudly."
How T. Boone Pickens' Energy Plan Just Got Killed
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By David Morris
By David Morris
The financial bailout bill passed by Congress may have once and for all put an end to T. Boone Pickens’ energy plan. Let me explain.
Until the financial meltdown obliterated all other news coverage, T. Boone and his energy plan were everywhere. His book, The First Billion Is the Hardest, is number two on the bestseller list. During the Republican and Democrat Conventions his press conferences were attended by a fawning media, virtually all of who filed stories with the theme "oil man turns wind energy advocate."
Indeed, even the more than casual reader might come away believing the Pickens Energy Plan was all about wind energy. T. Boone’s web site does little to contradict that impression. It displays nothing but wind turbines.
But expanding wind energy is not the key element in his plan. The reason is that that the plan’s goal is to reduce our dependence on oil and the electric sector uses very little oil. Thus expanding wind-generated electricity does little to move us in that direction. Instead, the heart of Pickens’ plan is to purportedly use increased wind energy to back out the natural gas in our electricity system. Pickens wants to eliminate our use of natural gas to generate electricity and instead use it to in our vehicles.
In California, Pickens has been more upfront about his intentions. The Texas oil and gas billionaire has single handedly financed a ballot initiative that would raise $3 billion for incentives for vehicles using cleaner fuels. The initiative heavily favors natural gas vehicles. The biggest rebates would go toward the purchase of heavy-duty trucks and transit buses fueled by natural gas. Only natural gas vehicles would quality for the largest rebate for passenger vehicles -- $10,000.
The primary beneficiary of this ballot initiative would be Clean Energy, the nation’s biggest supplier of natural gas for transportation needs. Mr. Pickens is majority shareholder of Clean Energy.
The Pickens energy proposal has a fatal flaw. Transforming our transportation fleet to natural gas will require massive investments in new engines and new fueling systems. Although largely buried in the fine print, Pickens isn’t proposing to use natural gas to entirely replace transportation fuels derived from oil. His goal is a 20 percent replacement. So after 15-20 years and the expenditure of tens, if not hundreds of billions of dollars we would then have a transportation system still 80 percent dependent on oil and 20 percent dependent on a fossil fuel whose life expectancy is not much longer than oil’s.
A far better plan, and one proposed by a growing number of groups and individuals (including my own, the Institute for Local Self-Reliance, in a recent report titled Driving Our Way to Energy Independence)is to electrify our transportation system. Instead of converting part of our transportation system to natural gas, only to have to then convert it again to renewable fuels, we should convert the transportation system to electricity, and make that electricity increasingly renewable as solar and wind power expand.
Electric vehicles have important advantages over natural gas (or gasoline) powered cars. They are more efficient. They are quiet. They generate no tailpipe emissions.
Moreover, their combined battery storage capacity could usher in a more democratic energy system where households generate transportation fuel from their rooftop solar array and store it in the vehicles’ batteries, and, if needed, use their electric vehicles as backup power plants for their homes.
Unlike natural gas cars, electrified cars also lend themselves to being introduced incrementally. There is no partial natural gas car. On the other hand, there is a plug-in hybrid electric vehicle, the first generation of which will be introduced commercially in 2010. The initial PHEVs might have a limited driving range. As a result, initially electricity might power only 25 to 50 percent of the total miles driven. But as battery performance increases and costs drop, electricity will provide a majority and perhaps even 100 percent of the fuel used. Even at lower percentages, if the backup engine for the PHEV were a flexible fuel engine, then biofuels could replace oil, bringing the total oil displacement above 85 percent.
In June 2007, Senators Obama, Orrin Hatch (R-UT) and Maria Cantwell (D-WA) introduced a bill that would give handsome incentives to manufacturers of electrified cars. After the House of Representatives rejected the initial bailout bill, the Senate added on some $110 billion worth of incentives for a wide range of purposes and industries. The Obama, Hatch, Cantwell bill was one of them. It offers a tax credit of up to $7,500 for electrified vehicles. The incentives phase out after sales of electrified vehicles, either plug in hybrids or all electric cars, reach 250,000 in any calendar quarter.
The passage of that bill will accelerate the already vigorous rush by manufacturers to develop a high performance, long lasting and inexpensive car battery. Companies are working on dozens of configurations and in the last two years progress has been swift. The incentives offered should cover 25-50 percent of the cost of these new car batteries, shaving the payback period for electrified vehicles to under 5 years or less.
The financial meltdown probably has killed Pickens’ chances of gaining passage of his natural gas initiative in California. Few voters there will approve putting the state even further in debt. And the passage of the Congressional bailout bill should mark the demise of his overall plan, as electric cars go mainstream, leaving the idea of natural gas cars in the dust.
Who Owns The Federal Reserve?
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By Ellen Brown
The Fed is privately owned. Its shareholders are private banks
By Ellen Brown
The Fed is privately owned. Its shareholders are private banks
"Some people think that the Federal Reserve Banks are United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lenders."
– The Honorable Louis McFadden, Chairman of the House Banking and Currency Committee in the 1930s
The Federal Reserve (or Fed) has assumed sweeping new powers in the last year. In an unprecedented move in March 2008, the New York Fed advanced the funds for JPMorgan Chase Bank to buy investment bank Bear Stearns for pennies on the dollar. The deal was particularly controversial because Jamie Dimon, CEO of JPMorgan, sits on the board of the New York Fed and participated in the secret weekend negotiations.1 In September 2008, the Federal Reserve did something even more unprecedented, when it bought the world’s largest insurance company. The Fed announced on September 16 that it was giving an $85 billion loan to American International Group (AIG) for a nearly 80% stake in the mega-insurer. The Associated Press called it a "government takeover," but this was no ordinary nationalization. Unlike the U.S. Treasury, which took over Fannie Mae and Freddie Mac the week before, the Fed is not a government-owned agency. Also unprecedented was the way the deal was funded. The Associated Press reported:
"The Treasury Department, for the first time in its history, said it would begin selling bonds for the Federal Reserve in an effort to help the central bank deal with its unprecedented borrowing needs."2
This is extraordinary. Why is the Treasury issuing U.S. government bonds (or debt) to fund the Fed, which is itself supposedly "the lender of last resort" created to fund the banks and the federal government? Yahoo Finance reported on September 17:
"The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters."
Normally, the Fed swaps green pieces of paper called Federal Reserve Notes for pink pieces of paper called U.S. bonds (the federal government’s I.O.U.s), in order to provide Congress with the dollars it cannot raise through taxes. Now, it seems, the government is issuing bonds, not for its own use, but for the use of the Fed! Perhaps the plan is to swap them with the banks’ dodgy derivatives collateral directly, without actually putting them up for sale to outside buyers. According to Wikipedia (which translates Fedspeak into somewhat clearer terms than the Fed’s own website):
"The Term Securities Lending Facility is a 28-day facility that will offer Treasury general collateral to the Federal Reserve Bank of New York’s primary dealers in exchange for other program-eligible collateral. It is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. . . . The resource allows dealers to switch debt that is less liquid for U.S. government securities that are easily tradable."
"To switch debt that is less liquid for U.S. government securities that are easily tradable" means that the government gets the banks’ toxic derivative debt, and the banks get the government’s triple-A securities. Unlike the risky derivative debt, federal securities are considered "risk-free" for purposes of determining capital requirements, allowing the banks to improve their capital position so they can make new loans. (See E. Brown, "Bailout Bedlam," webofdebt.com/articles, October 2, 2008.)
In its latest power play, on October 3, 2008, the Fed acquired the ability to pay interest to its member banks on the reserves the banks maintain at the Fed. Reuters reported on October 3:
"The U.S. Federal Reserve gained a key tactical tool from the $700 billion financial rescue package signed into law on Friday that will help it channel funds into parched credit markets. Tucked into the 451-page bill is a provision that lets the Fed pay interest on the reserves banks are required to hold at the central bank."3
If the Fed’s money comes ultimately from the taxpayers, that means we the taxpayers are paying interest to the banks on the banks’ own reserves – reserves maintained for their own private profit. These increasingly controversial encroachments on the public purse warrant a closer look at the central banking scheme itself. Who owns the Federal Reserve, who actually controls it, where does it get its money, and whose interests is it serving?
Not Private and Not for Profit?
The Fed’s website insists that it is not a private corporation, is not operated for profit, and is not funded by Congress. But is that true? The Federal Reserve was set up in 1913 as a "lender of last resort" to backstop bank runs, following a particularly bad bank panic in 1907. The Fed’s mandate was then and continues to be to keep the private banking system intact; and that means keeping intact the system’s most valuable asset, a monopoly on creating the national money supply. Except for coins, every dollar in circulation is now created privately as a debt to the Federal Reserve or the banking system it heads.4 The Fed’s website attempts to gloss over its role as chief defender and protector of this private banking club, but let’s take a closer look. The website states:
* "The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation’s central banking system, are organized much like private corporations – possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year."
* "[The Federal Reserve] is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms."
* "The Federal Reserve’s income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. . . . After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury."5
So let’s review:
1. The Fed is privately owned.
Its shareholders are private banks. In fact, 100% of its shareholders are private banks. None of its stock is owned by the government.
2. The fact that the Fed does not get "appropriations" from Congress basically means that it gets its money from Congress without congressional approval, by engaging in "open market operations."
Here is how it works: When the government is short of funds, the Treasury issues bonds and delivers them to bond dealers, which auction them off. When the Fed wants to "expand the money supply" (create money), it steps in and buys bonds from these dealers with newly-issued dollars acquired by the Fed for the cost of writing them into an account on a computer screen. These maneuvers are called "open market operations" because the Fed buys the bonds on the "open market" from the bond dealers. The bonds then become the "reserves" that the banking establishment uses to back its loans. In another bit of sleight of hand known as "fractional reserve" lending, the same reserves are lent many times over, further expanding the money supply, generating interest for the banks with each loan. It was this money-creating process that prompted Wright Patman, Chairman of the House Banking and Currency Committee in the 1960s, to call the Federal Reserve "a total money-making machine." He wrote:
"When the Federal Reserve writes a check for a government bond it does exactly what any bank does, it creates money, it created money purely and simply by writing a check."
3. The Fed generates profits for its shareholders.
The interest on bonds acquired with its newly-issued Federal Reserve Notes pays the Fed’s operating expenses plus a guaranteed 6% return to its banker shareholders. A mere 6% a year may not be considered a profit in the world of Wall Street high finance, but most businesses that manage to cover all their expenses and give their shareholders a guaranteed 6% return are considered "for profit" corporations.
In addition to this guaranteed 6%, the banks will now be getting interest from the taxpayers on their "reserves." The basic reserve requirement set by the Federal Reserve is 10%. The website of the Federal Reserve Bank of New York explains that as money is redeposited and relent throughout the banking system, this 10% held in "reserve" can be fanned into ten times that sum in loans; that is, $10,000 in reserves becomes $100,000 in loans. Federal Reserve Statistical Release H.8 puts the total "loans and leases in bank credit" as of September 24, 2008 at $7,049 billion. Ten percent of that is $700 billion. That means we the taxpayers will be paying interest to the banks on at least $700 billion annually – this so that the banks can retain the reserves to accumulate interest on ten times that sum in loans.
The banks earn these returns from the taxpayers for the privilege of having the banks’ interests protected by an all-powerful independent private central bank, even when those interests may be opposed to the taxpayers’ -- for example, when the banks use their special status as private money creators to fund speculative derivative schemes that threaten to collapse the U.S. economy. Among other special benefits, banks and other financial institutions (but not other corporations) can borrow at the low Fed funds rate of about 2%. They can then turn around and put this money into 30-year Treasury bonds at 4.5%, earning an immediate 2.5% from the taxpayers, just by virtue of their position as favored banks. A long list of banks (but not other corporations) is also now protected from the short selling that can crash the price of other stocks.
Time to Change the Statute?
According to the Fed’s website, the control Congress has over the Federal Reserve is limited to this:
"[T]he Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute."
As we know from watching the business news, "oversight" basically means that Congress gets to see the results when it’s over. The Fed periodically reports to Congress, but the Fed doesn’t ask; it tells. The only real leverage Congress has over the Fed is that it "can alter its responsibilities by statute." It is time for Congress to exercise that leverage and make the Federal Reserve a truly federal agency, acting by and for the people through their elected representatives. If the Fed can demand AIG’s stock in return for an $85 billion loan to the mega-insurer, we can demand the Fed’s stock in return for the trillion-or-so dollars we’ll be advancing to bail out the private banking system from its follies.
If the Fed were actually a federal agency, the government could issue U.S. legal tender directly, avoiding an unnecessary interest-bearing debt to private middlemen who create the money out of thin air themselves. Among other benefits to the taxpayers. a truly "federal" Federal Reserve could lend the full faith and credit of the United States to state and local governments interest-free, cutting the cost of infrastructure in half, restoring the thriving local economies of earlier decades.
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